Iraq's 30-Day Oil Embargo Most Likely To Hurt Poor Countries

by Abid Aslam

Iraqi President Saddam Hussein, in a speech broadcast over national media, announced today: "The Iraqi leadership declared the complete stoppage of oil exports starting from this afternoon, Apr., 8 for a period of 30 days when we will further decide policy, or until the Zionist entity's (Israel's) armed forces have unconditionally withdrawn from the Palestinian territories."

The decision affects two million barrels per day, or four percent of international oil supplies, according to figures from the Organization of Petroleum Exporting Countries (OPEC). It was announced, however, as labor strife in Venezuela slowed exports to a trickle in the world's No. 4 oil exporting country.

Combined, the supply interruptions drove up crude oil futures by about six percent in London, taking the benchmark Brent prices almost to a six-month high.

U.S. energy and economic analysts played down the effect of the Iraqi move even as they acknowledged it stoked anxiety about the Middle East, home to two-thirds of the world's proven oil reserves.

"It's not significant," Michael Pineles, Latin America strategist at New York-based financial researchers IDEAglobal said of the Iraqi move. "Oil markets have been going up for quite a while."

Iraq's move evokes the early 1970s, when Arab nations cut back on oil exports and triggered a global energy crisis marked by major supply shortages in the United States and Europe.

"Having learned from the harrowing experience, Western economies are now better prepared for sudden supply disruptions, with huge strategic reserves ready to be tapped if necessary," said Matthew Freedman, an economist at Economy.com.

Fears that oil prices will rise far enough to stall what many economists see as a gathering U.S. recovery could spur Saudi Arabia, the top exporter, and other OPEC members to increase production to offset the Iraqi and Venezuelan disruptions, unnamed cartel officials were quoted as saying in European reports today.

A number of oil traders and analysts interviewed today said they expected Saudi Arabia, Kuwait, and other OPEC members would quietly increase production to keep prices stable.

In addition, said industry watchers, rising crude oil prices would provide incentive for independent producers such as Angola, Russia, and Norway to boost production.

Iran and Libya had said they would back a ban such as Iraq's but only if all Arab producers supported it.

Even if they succeeded, the United States and Europe would feel the impact only after poorer and weaker economies, analysts said.

"Generally, this is more of a risk for net importers of oil with poor economies and weak currencies," said Pineles.

Those at risk include former Asian 'tigers' clawing their way back from economic crises that began in 1997 and 1998.

"These countries have very little cushion to absorb these shocks," said Anindya Chatterjee, Asia strategist at IDEAglobal. "They've gone through sharp contraction. They're just beginning to show symptoms of economic revival. There is a sense that exports have bottomed out (so they can only go up). At a time like this, an oil price hike can really hurt."

Higher oil prices would drive up the costs of producing and transporting the exports of struggling economies like Thailand and Korea, Chatterjee said. "An increase in the costs would affect profitability and hence investment decisions."

"The West is not nearly as dependent upon oil as it was in 1973," said U.S.-based intelligence consultants Stratfor. "The United States consumes only 60 percent as much oil per dollar of GDP (gross domestic product) generated as it did in 1973 (the last Arab oil embargo)." The reverse is true for much of Asia and for countries like Brazil: net oil importers whose reserves have dwindled and whose energy efficiency has stalled or deteriorated.

Iraq exports oil under a humanitarian exchange with the United Nations, permitted as an exception to 1990 Gulf War sanctions. Cash from the sales is banked in a New York escrow account controlled by the United Nations and released only for food and medicine. U.N. officials confirmed today that Iraqi oil had stopped flowing to export terminals.

The United States and Europe are Iraq's major customers, according to OPEC. Despite Washington's hostility to Saddam, the United States buys half of Iraq's oil exports to satisfy nine percent of U.S. import demand.

Venezuela supplies 15 percent of U.S. oil imports, according to U.S. government data. Exports reportedly almost dried up today due to an escalating dispute at the national oil company, Petroleos de Venezuela, between some managers and new executives appointed by President Hugo Chavez.

OPEC's 11 members account for 41 percent of the world's crude oil production and 55 percent of the oil traded internationally, according to the cartel's website, www.opec.org.